IFAs and agents looking for a simple alternative investment to add to their menu of products could do a lot worse than gold.
You don’t need a masters in economics to understand it and you don’t need to be regulated to sell it. In this article Daniel Kiernan, chief analyst at Alternative Outlook outlines some of the benefits and key selling points.
What are the Benefits of Gold for Agents?
There are two key benefits of gold that agents should bear in mind.
Firstly, it’s an opportunity to earn commissions that they wouldn’t earn otherwise. While large investments are not uncommon, gold is a low entry level, liquid alternative to cash and what many agents find is that it’s a great tool for “sweeping up” smaller amounts of cash. These are those 3k – 25K amounts that would otherwise remain un-invested in consumers’ portfolios. This makes gold a great supplementary product to offer alongside property projects that are bigger, longer term commitments for consumers. So you’ve got something that compliments, rather than competes with your current products and at the same time helps maximise the commissions you earn from your clients.
The second key benefit of gold is that it’s a very simple product that’s easy for consumers to understand and hassle free sale for agents.
It’s easy for consumers to understand because everybody is aware of gold as a valuable commodity and store of wealth – even if it’s only through James Bond villains or purchases of jewellery, everybody knows that gold is valuable! The gold price is totally transparent and quoted daily in most newspapers and finance websites, and there is a wealth of information out there so consumers can quickly and easily do some research and satisfy themselves that that this is an asset they can understand. There are no counterparties or management teams to carry out due diligence on, no complex mathematics to work out ROI figures and they don’t have to factor in the performance of local economies or sectors into their decision making process.
It’s a hassle free sale because its a commodity. Gold is gold and the only question is whether the consumer thinks it suits their investment objectives. There are no other issues or emotions around it. You don’t have to overcome objections to the location, the developer, the hotel operator; you don’t have to deal with emotions or a drawn out purchase process. There are no complex legal documents to complete and the exit is clear – the consumer can sell their gold the very next day if they want to get out of the investment.
So it should be a quick and hassle free sale. But why should a consumer consider an investment in gold?
Key Selling Points
I think there are four key selling points to get across to potential investors:
- Portfolio Insurance
- Liquidity
- Strong Performance
- Tax Free
I’ll expand on each in turn.
Portfolio insurance is another term for diversification. Gold is a strong performer in a crisis and gold does well when other, more commonly held assets such as equities and bonds do badly. There’s plenty of evidence for this: gold spiked higher after 9/11, during the build up to the wars in Iraq and Afghanistan and gold continued to outperform throughout the market downturn in 2008. So by having some gold in their portfolio, consumers can protect themselves against the full impact of another downturn or crisis. If you have a consumer who feels uncertain about the future direction of the markets, then they should be considering investing in gold.
Liquidity. There’s always a market for gold, so it’s a very liquid asset. A consumer can liquidate their holding and realise their cash very quickly. Furthermore they can choose to liquidate their holding one piece at a time. There’s no need to liquidate the entire holding at once. This liquidity is one of the reasons gold is a great alternative to cash – especially in these times of high inflation and low interest rates. If you have a consumer who feels like their cash deposited in the bank is performing poorly, gold could be for them.
Strong performance. Gold has returned 25% a year on average for the last 10 years. It’s up 25% this year at the time of writing having surpassed its previous record high of $1400 dollars and it’s almost unanimously forecast to go higher still. When you compare returns like these to the performance of other markets over the same period, they are hard to ignore. (see the side bar for an explanation of the reasons behind this stellar performance)
Tax Free. Purchases of gold bullion in the UK are currently VAT exempt. There’s no income tax (as gold doesn’t earn any income) and gold bars are SIPP acceptable and therefore qualify for up to 40% tax relief. And if a client invests outside of a SIPP wrapper, by investing in UK gold coins they can still avoid Capital Gains Tax as technically, the coins are still legal tender and therefore can’t be taxed. And gold can be a thoughtful heirloom – half a dozen gold bars stored in the family safety deposit box can be a much less complex inheritance then property, savings or shares for example.
Objections
There is one key objection that you are likely to come up against – market timing. Many potential investors will look at the performance of gold over the last decade and ask “Have I missed the boat? Am I too late?”
There are four points I make in response to this
- The fundamentals behind gold’s strong performance are still in place. (see side bar)
- Gold might have hit it’s nominal record high, but adjusted for inflation that high would be about $2300 dollars so from this perspective there is some way to go yet.
- Gold provides portfolio insurance, so performance is not the only investment objective. The investment is also an insurance against another crash or market downturn, not just an opportunity for a quick buck.
- People were saying they had missed the boat 2, 3, 4, 5, 6 years ago and missed out on the subsequent performance! Timing the market is notoriously difficult: fundamentals and investment objectives should be more important considerations then timing.
What are the Fundamentals Behind Gold’s Performance?
- The flight to safety from investors seeking a secure home for their wealth in the face of continued market uncertainty
- The weakening US dollar supports the gold price. Gold is an alternative to the dollar as the world’s reserve currency.
- Increased demand from central banks (one statistic that gold bugs get really excited about is the fact that BRIC countries only have approximately 5% of their reserves in gold on average, developed countries are closer to 50% so if the BRICs start to move towards the 50% levels there will be a huge demand for gold)
- Increased demand from the growing middle classes in India and China. There is a long tradition of saving in gold in these countries and their purchasing power is increasing as their currencies strengthen. Gold’s recent record high was partly driven by the demand for jewellery in India during the Diwali festival.
- No significant new discoveries. There have been no recent discoveries of gold of any significance and if there were there is a ten year lead time between making a discovery and getting gold out of the ground and onto the market. So we are not going to see a sudden increase in supply that drives the price down.
Conclusions
- Gold compliments property, it doesn’t compete with it
- Low Entry – gold sweeps up smaller amounts of cash that agents couldn’t tap into otherwise.
- Gold is easily understood and everybody has heard of it
Gold is an investment your clients should consider because:
- Gold provides portfolio insurance in uncertain times
- Gold is a strong performer
- Gold is a liquid asset and an alternative to cash
- Gold is a tax free investment in the UK